Blue Cross Blue Shield Insurers Kept Hiking Premiums Even After Exceeding Recommended Surplus

Insurers have to maintain a safety net of money to protect themselves from unforeseen market conditions, but a new study from Consumers Union says that some Blue Cross Blue Shield insurers took it too far, preferring to focus exclusively on stockpiling cash at the expense of customers. Two of the worst cases have stockpiles 5 to 7 times higher than state solvency requirements, yet continue to hike premiums each year instead of using the, uh, surplus surplus to offset customer costs.

Based on its findings, Consumers Union is recommending state insurance commissioners examine these surpluses, develop appropriate ranges for minimum and maximum surplus, and disapprove or reduce rate increases, particularly on individual market plans, when the company has more surplus than is necessary for solvency protection.

The report notes a few states have started to reject rate increases on the grounds that previously accumulated surpluses were sufficient to absorb any potential underwriting losses and that it is appropriate to balance profit expectations against the financial hardship the increase would impose on policyholders. Consumers Union urges all states to analyze surplus as part of their review process for rate increases.

“New Report by Consumers Union: Nonprofit Blue Cross Blue Shield Health Plans Built Up Huge Surpluses, Yet Seek Huge Rate Increases” [Consumers Union]

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  1. Loias supports harsher punishments against corporations says:

    A recent article discussed the possibility of the Fed to charge banks a negative interest on excess cash reserves. In other words, banks would be penalized if they kept too much cash and didn’t lend enough money.

    Sounds like the same concept could work with insurers. Penalize them for exceeding a level of surplus.

    • UCLAri: Allergy Sufferer says:

      Wait a second. How is that in any way a good idea for banks?

      Just a while ago, various actors within the federal government were castigating banks for not having adequate cash reserves for loan losses. Banks were told to increase their liquidity ratios and reduce risky lending.

      Now we want to punish them for that?

      I’m all for increasing lending, but let’s face it: LIBOR rates suggest that lending is up significantly compared to 08-09. Is lending down from pre-Lehman? Yes. And damn right it should be. There were too many risky loans being thrown out there before.

      There’s nothing wrong with less lending as long as it’s less lending to bad borrowers.

      • PencilSharp says:

        That would be correct! Your No-Prize is in the mail.

        The biggest problem we’re facing with this economy is all the uncertainty. Businesses are afraid to hire because every employee could be an expensive liability under the HCRA. Banks are afraid to loan because they did what the Feds told them to do (loan to unqualified applicants) and were hung out to dry by those same Feds when the defaults hit.

        And the unspoken biggie is that insurance companies (like BCBS) are also trying to stockpile as much cash as possible to buy some time under the HCRA. The tenability of HCRA is debatable (mainly: will it kill off the industry in two years or four?), and the Act will likely be modified soon after the 112th Congress takes over (among many many others), so the reason for the stockpile is simple:

        Can we hang on until this Administration goes away?

        Right now, that looks like an excellent question…

        • Difdi says:

          ALL insurance is, essentially, no different from the original Lloyds of London model, from back in the day when Lloyd ran a coffee shop. The insurance company and the customer make a wager; The customer bets that they will get sick/injured/dead, while the company bets that the customer will not. And the wager is repeated each month. If the company wins, it gets the money, if the customer wins, the customer does, if that can be called winning.

          By playing the odds, the companies can offer larger payouts than the customer’s wagered amount. But an insurance company exists to make money, not to break even. Nobody would ever run a for-profit company that never makes profits. But the situation is worse than that. Under the reform act, almost everyone can get insurance, and while the amount the customer must wager varies, the company cannot really refuse an offered wager anymore, no matter how bad the odds are for them.

          This leads to a greater number of lost wagers for the company, which will, eventually, once their cash surplus is gone, cause the company to go into the red, and right out of business. Which means all their customers at the time need a large government bailout, or will have no insurance.

          Extending such practices to any other for-profit industry will have the same result: The companies in question must either convert to non-profit operations, or go out of business. The only possible result from legislating what too much profit is, is socialism. Which isn’t necessarily a bad thing if done properly and with proper forethought…but neither of those things are being done, and the country won’t be recognizable afterwards.

  2. ARP says:

    IMO- They know they won’t be as profitably once HCR fully kicks in, so they can use the large cash reserves they’ve created to offset that for a few years and make the market happy.

    Or, they think our economy is screwed and are building a safety make out of large stacks of money.

  3. Nighthawke says:

    *Growls* And here I thought after the dust-up between California and the insurers there they would have straightened up and be more accountable. Nope, they went back to business as usual.

  4. c!tizen says:

    F’ers.

  5. nova3930 says:

    Wait a second, didn’t we just have an issue with insurance companies and banks NOT having enough $$$ on hand to cover liabilities that people got pissed off about because the end result was Uncle Sam (ie we the people) bailing them out?

    Now it seems like people are getting pissed over the exact opposite….

    • Pepster says:

      Exactly Right.

      Also, absent from the article is the fact that the State requirements are often a MINIMUM.

    • obits3 says:

      I think that people in this country are greedy on a national scale. There is no personal responsiblity when it comes to voting. They complain when banks are conservative that there are not enough loans, then when the banks become liberal with their funds, people complain that there is too much risk being taken. I fear that this cycle will continue to oscillate back and forth for many many years. The problem is that laws passed by congress take time and sway financial institutions to one extreme or another. Also, there is no long term perspective in this country.

      How dare a health insurance company want to stockpile cash on the eve of the biggest overhaul of our financial system!/sarc

      While I understand the need to offset costs with investment income, I don’t like how our country seems to punish savers and then wonder why we owe everybody money.

      • obits3 says:

        *financial system = Health Care Bill (I am not saying anything for or against it, just that it is a big deal, and one should expect responsable companies to be a little risk averse until we see how this law will change the economy)

      • TailsToo says:

        Lots of people love to say how they hate socialism, but when faced with events like this, they want to punish the company.

        The company is there to make money. Not to service customers. If they could legally take their money and throw the customer’s bodies in a ditch, they would. It’s not a good model for their long term business, but in the short term, hey, great profits!

        If you remove the public option from health care, and insurance companies remain for profit entities, this is the consequence.

    • Coelacanth says:

      I was wondering the same thing after reading Bernake’s plans. We’re so afraid that the bank’s balance sheets are so poor, and yet we’re also claiming that they have too much in reserves?

      Which is it???

      I think they should start looking at ways to boost jobs *without*:

      a) Using large financial institutions as an intermediary
      b) Massive tax cuts

      As for health insurance companies, they should be called to the carpet to explain why the cost of doing business is anywhere close to 9%+ per year as justification for their ridiculous rate hikes. (And honestly, if the cost of health insurance really *is* that inflationary, perhaps some real leadership can identify a good solution to combat it.)

      • obits3 says:

        It is possible that the 9% a year is due to increased medical costs. The more cool things we get, the more it cost. You can ride your bike to work or for a lot more financial cost you can drive a car. I imagine an X-ray is less expensive than MRI’s and CAT scans. Over much time the costs should go down due to economies of scale; however, in the beginning, we will be recouping the cost of these new machines as more hospitals get them. Why does my phone plan cost $40 a month, but if I use a smart phone it goes over $100? New technology cost $$

        • Bob says:

          Then explain why our per MRI and CAT scan billed costs to insurance companies and to us are so much out of line with the rest of the world. I didn’t say just Britain or Germany or Sweden, I mean the rest of the entire world.

          Our costs for medical procedures are so out of line that under-insured Americans are having to do abroad to have elective surgeries. And I don’t just mean to Latin America or Thailand, I mean industrialized countries as well. Even Japan is an option for “medical tourism” believe or not.

          The Healthcare complex in this country is eating itself alive with each party trying to extract the most profit from each and every transaction. Doctors have to earn lots of money to pay student loans and malpractice insurance, hospital have to mark up the price of everything by 10000% to hope to get enough during negotiations with insurance companies, who they themselves have to have a cash reverse WHEN the collapse happens.

          • nova3930 says:

            Because we pick up the slack for what the rest of the world DOESN’T pay. Medical equipment R&D isn’t cheap.

            Medical equipment companies don’t have magic unicorns that fart $$$ so when the Brits, Germans and French are paying right at or slightly above costs, that R&D money has to come from somewhere else if you expect to continue to have newer and better equipment.

            If you’re OK having same type and quality of equipment in 10 or 20 years as you have now instead of better, we can cram prices down the same as the rest of the world does.

    • ARP says:

      There should be a balance. I can understand having a some extra cash available given current economic conditions, but 7X surplus amounts seems to go kind of far, especially since they keep raising rates.

    • theycallmeGinger says:

      Your point is valid, and I think it’s hard to determine how much is too much to stockpile. However, the point of the article is that when they have 5 to 7 times the amount of required surplus, they shouldn’t be raising premiums at such a high rate.

    • bite back says:

      It could be HOW the reserve is funded: if BCBS is soaking the insured to build their reserve while they pay their executives obscenely and make out-sized dividend payments to shareholders, then our outrage is justified.

    • craptastico says:

      a big reason issurance companies were low on reserves was that the reserves are usually invested. a couple years ago those investments lost a lot of value so they were underfunded. they raise rates to garner more reserves. now those investments have come back up in value so they have excess reserves.

      • bite back says:

        If that is the case, please explain why the premium increases haven’t been scaled back. Just a case of extra greedy behavior?

  6. Excuse My Ambition Deficit Disorder says:

    2nd reason the U.S. economy is in the state that it’s in…

  7. Supes says:

    Companies hoarding money does not lead to good things.

  8. Pepster says:

    This article includes NO understanding of insurance surplus.

    For starters, (as pointed out above) we just had a financial crises caused by a shortage of surplus! Everyone was pissed at banks and insurers for not holding enough cash!

    Secondly, the state minimum is just that – a MINUMUM. If your bank requires you to keep $250 in your checking account, should I call you a miser for exceeding that? The rating firms (Fitch, Moody’s, S&P, AM Best) have requirements that are entirely seperate (and higher) than a state minumum in order to acheive the best ratings. Better ratings equals lower risk and less cost.

  9. TailsToo says:

    Yay, Capitalism!

    • TuxthePenguin says:

      You do realize that BCBS are non-profit, right?

      And, having worked in medical billing, they’re also lousy payers…

  10. PunditGuy says:

    Don’t they have loss ratios to maintain? I know for some of our products (none are health insurance), if we make too much money on premiums and don’t pay out enough in claims, it’s a red flag. Certain states can fine us for that, because it’s a possible sign that something is out of whack with the product — people don’t understand their coverage, we’re denying too many claims, we misidentified the risk when pricing the product, etc.

  11. RonDiaz says:

    Well as far as I can tell reading this it’s not like the money was being pumped to some CEO (although io am sure plenty still is) but rather to balance the fund should things go south…considering the economic mess we are in perhaps not a bad idea…but at the same time people can’t afford 20% price increases….so I would reduce the surplus a little (and CEO salary a lot) to soften the blow…it’s probably a bad idea to have the gov’t force them to do something here though

  12. chiieddy says:

    In the NPR report this morning regarding this, Blue Cross of Massachusetts stated they keep $1.6 billion on reserve as is adequate. They also claim the report is misleading and full in incorrect data. How does CU respond to this allegation?

    http://commonhealth.wbur.org/wbur-posts-and-stories/2010/07/report-blue-cross-hoarding-cash-while-raising-premiums/

    • llcooljabe says:

      The article is certainly misleading and written in ignorance of the financial realities of the real world. See my comments below.

      In today’s climate, it’s easy to get exposure by writing an article about healthcare. But these sorts of articles should be researched and written by actuaries. how about by the actuary that discovered the error in the 39% rate increase in Anthem’s request in California?

      The author of the article and that roberto guy clearly have no idea what they’re talking about. There are plenty of consumer advocate actuaries that could write an article on this topic and be far more credible.

  13. what says:

    A lot companies are now dropping them as their primary insurance carrier because of the extreme hike in premiums. Looks like they are going to need that surplus.

  14. Mike says:

    I dream of the day when health care is a moral issue first, financial second. The rest of the industrialized world has reached this point, the question is when will we?

    • dreamfish says:

      … but that’s SOCIALISM!!!! (and therefore un-American)

      • RadarOReally has got the Post-Vacation Blues says:

        And we all know Socialism=Nazis, so we can’t be having that!

    • nova3930 says:

      And I dream of the day when we as a nation remember that fundamental liberties come first and the power of gov’t should not be used to trample them for social engineering and “feel good” policies.

      I’m not holding my breath though…

      • PunditGuy says:

        Completely, utterly ridiculous. Drug safety, food safety, product safety, worker safety, environmental cleanliness, civil defense, national defense, infrastructure, and even physical well-being — these are not things you should leave purely to the whims of a market driven solely by profit. They are not “feel good” policies. After all the spectacular cock-ups perpetrated by industry in the last few years, it amazes me that there are still people walking around who think like you do.

        In your world, it’s my fundamental liberty to either pay through the nose for United Healthcare or go without insurance entirely. You seriously think that any attempt to break up that binary situation is an affront to my rights? Screw you. Bring on the socialism.

        • Mike says:

          You socialist! You want to live in a world where your health care is not conditional upon your income. You expect society as a whole to pitch in and absorb the cost of health care? Sure, my tax dollars pay for a fire truck to put out a fire at your house and will pay to send bombs around the world, but you expect my tax dollars to ever help you get over cancer? Killing people and preventing your material possessions from burning are worthwhile causes, but your health should be like a big screen TV, you should only have the best if you can afford.

          I really wish people who oppose real health care reform could understand how stupid their arguments really sound.

  15. OnePumpChump says:

    Hey, you, stop milking that cash cow!

  16. llcooljabe says:

    When people publish studies, they should publish with understanding of the topic at hand. here are the topics at hand. This consumers union article is ignorance at best, fear mongering at worst.

    1. State funding requirements of surplus are minimums. If they go below that, then insolvency issues arise. Therefore, it’s in everyone’s best interests for the insurers to build a very, very healthy surplus. The article says that BCBS’ surplus is 3x the state minimum. If I was a BCBS policy holder, that would make me feel good. if an insurer was hovering at the ratio, then an educated consumer would be looking for insurance elsewhere.

    2. If the surplus ratio falls too low, insurers are liable to lose their A+ (or higher) ratings with rating agencys such as AM Best, S&P and others. This will affect their ability to write business. For example, many companies only buy insurance from a company with a rating of A+ or higher.

    3. Insurance companies, like gawker or Google or BMW are there to make a profit. And like any sane business, they analyze each segment separately. If segment A is losing money, then something must be done. Either modify rates and rules or shut it down. Ford shut down mercury for this very reason. One may expect the insurer to use its profits from other lines to subsidize a money losing segment, but that’s not how business is done in any other industry, why should insurance be separate.

  17. ishootfriendlies says:

    The real shame here is that consumers are forced to use Blue Cross, not one of their competitors who charge a lower premium. If they could only go to one of the 5-10 other insurers in their state and buy from them, the problem would be solved. Oh wait, they can do that…

    • PunditGuy says:

      I don’t know how insurance works where you’re from, but my employer offers coverage from a single insurance company. I suppose I could try to find a policy on the individual market, which would be an order of magnitude more expensive if any of them wanted to cover someone who’s had a heart attack.

      That’s not a real choice.

  18. jsfetzik says:

    From what I understand most of the building of reserves is a reaction to two things, 9/11 and Katrina. Insurance companies in general were hit hard by these events. Add to that the economic downturn and health care reform, and you end up with a lot of paranoia about having enough money to survive. With these being the non-profit Blues companies, they don’t have stock being traded on the market, so they were able to stockpile the cash out of paranoia.

  19. ScottCh says:

    CU may not have the full story here. It’s quite possible that some of these BCBSes are either planning to go private, or have already attempted to do so. BCBSNC is on the list, and they pushed hard and came very close to going private a few years ago. Their attempt was stopped by a thin margin. More recently, they lobbied heavily against the president’s health care reform bill. I strongly doubt that they have given up their plans to go private, even though they created by the public, for the public. I suspect that there are many BCBSes that would love the asset transfers and profits associated with being allowed to become private corporations.

  20. meltingcube says:

    When I had Blue Cross they rose my rates probably 4 times in a 1 year period, even though I never made a claim with them. The final straw was when they had security issues on their website and I could view other members personal information. Naturally they didn’t care so I just canceled.